Last week, the PBC introduced a significant set of economic measures, marking the first time a combination of rate cuts, reductions in the reserve requirement ratio, and structural monetary policies have been implemented together. The primary aim of these interventions is to address the ongoing property crisis, which has resulted in debt defaults among major real estate developers. Despite these efforts, the immediate impact on freight market may be limited, as the crisis continues to strain the property sector while the oversupply in the real estate market leaves little room for any significant construction activity in the short term.
Real estate has been central to China's rapid economic growth, accounting for up to 20% of economic activity. However, this reliance has created significant risks. Before the pandemic, housing prices rose much faster than household incomes. This environment encouraged developers to take on substantial debt, while land sales became a crucial revenue source for local governments. This has led to an oversupply in China's real estate market, particularly in lower-tier cities, which has created significant challenges. The government has considered acquiring large volumes of unsold homes as part of a comprehensive plan to mitigate the ongoing imbalance between supply and demand. This imbalance, alongside weakening buyer sentiment caused by low-income expectations and reduced spending, continues to weigh heavily on the market. The contraction in the property sector has become more pronounced, with housing starts plummeting by over 60% compared to pre-pandemic levels. While efforts to stabilize the market are underway, many developers remain financially strained but have avoided bankruptcy, partly due to regulations allowing lenders to delay recognizing bad loans, which has cushioned the impact on real estate prices and bank stability.
In response to mounting risks in the real estate sector, Chinese authorities have redirected their efforts toward managing these risks and promoting a more balanced growth model. Following the pandemic's onset, measures were taken to curb excessive borrowing among developers and to address systemic risks in the sector. As a result, real estate activity has sharply declined, with policies now focusing on expanding affordable housing, promoting rental units, and revitalizing underdeveloped urban areas. Today, as of August 2024, the latest data from NBS indicated that the total floor area of unsold real estate in China reached 648m square meters, highlighting the severity of the oversupply issue. The true number of vacant homes could be even higher, as many sold properties remain unfinished due to financial constraints.
Based on the points outlined above, it can be concluded that even if the stimulus measures were to mark a turning point for the Chinese real estate sector in terms of boosting buyer interest, a significant increase in iron ore demand, which is closely linked to the property sector, is unlikely. This is not only because the stimulus package is primarily focused on addressing the current oversupply of available space, but also due to the fact that iron ore demand is already too robust to expect a positive correction. In fact, iron ore demand has been notably strong throughout 2024, with a year-on-year increase of 5.1%. This growth can be attributed to factors outside of the troubled property sector. Firstly, stock levels, which reached a 7-year low in October 2023, have since been replenished, rising to 150 million tons. Additionally, the weaker trend in iron ore prices since early July has incentivized traders to import further. Domestic demand for steel has also been bolstered by other sectors such as shipbuilding, automotive, and renewable energy projects. Steel exports have been particularly robust, with a y-o-y increase of 20.6% for the first eight months of 2024, and exports are on track to exceed 100 million tons, the highest volume since 2016. However, this surge in exports may prompt further anti-dumping investigations into Chinese steel exports, a development that warrants close monitoring. The more pressing issue is that, with Chinese steel mills operating at negative margins and global demand for steel projected to decline, crude steel production is expected to decrease, which would, in turn, reduce seaborne demand for iron ore. Without support from the domestic property sector, the future trade volume of iron ore could see a downward trajectory.
Despite the pessimistic outlook regarding the impact of the stimulus package on iron ore imports, such measures should only be seen as a positive signal for stronger consumer activity in China. These relief efforts have the potential to boost consumer confidence, which currently stands at 86 points, the second lowest level on record. Beyond the real estate, the ripple effects of China’s demand contraction are being felt globally. Weak domestic spending is affecting various commodities, and in the case of the dry bulk market, grains are notably impacted. The sluggish livestock sector and ample supplies have resulted in year-on-year declines in corn and soybean imports by 16% and 1.7%, respectively. As this season’s harvest progresses, U.S. corn exports remain weak, French barley shipments to China have sharply declined, and Canadian exporters are facing significant challenges. Therefore, the significance of the stimulus package in enhancing consumer capital availability is becoming increasingly apparent, as it could help alleviate these ongoing difficulties.
Data Source: Intermodal